Types of Credit Plans

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The topics in the Dial-A-Law series provide general information on a wide variety of legal issues in the Province of Alberta. This service is provided by Calgary Legal Guidance funded in part by the Alberta Law Foundation.

This topic discusses credit options used to purchase goods or services and pay for them later. Credit is often used for larger items where it takes too long to save the purchase price. Purchases made on credit will cost more because interest and service charges are added monthly until the debt is paid in full. Plan your credit purchases carefully. Your debt payments each month should not be more than 40% of your gross monthly income. For example, if you make $1000 each month your debt payments should be $400 or less. Make a budget and stick to it.

There are several credit options available depending upon your purchase. The cost of borrowing is the primary difference between the types of credit:

Consumer Loans: These are loans offered for personal, family or household purposes. For example, you may want a loan to purchase new appliances, vehicles, boats, vacations, or have home renovations done. In most cases, the title or ownership of the purchase goes to the purchaser and the lender or bank will take the purchase as security for the loan. Sometimes, the lender or bank may want more security for the loan than just the purchase.

Term Loans: These are loans where regular equal payments are made over a certain period of time. You could take out a 3-year term loan to purchase a vehicle and make equal payments each month. You can lower monthly payments by asking for a longer period of time such as a 5-year term loan. Insurance can be taken out on this type of loan so that if you die, the loan is paid in full.

Credit Cards: Credit cards are issued by financial institutions, gas companies, department stores or special agencies such as American Express or Visa. The interest rates are much higher than the current rate on consumer loans. The terms of the credit card agreement may require you a monthly payment or payment in full each month.

Line of Credit: This type of credit arrangement is made with your bank where you are allowed to write cheques or withdraw cash up to a certain limit. You pay interest only on the amount of money you borrow. The rates are generally lower than credit card interest rates. There is also an administration fee charged for the line of credit.

Conditional Sales Contract: This contract is used for the purchase of major items such as cars, furniture or appliances. In this type of credit option, title and ownership remains with the seller until the goods are paid in full. You can take possession of the goods and use the goods but you cannot sell the purchase or neglect or damage it in any way.

If you buy goods on credit, the lender will often ask for security. The security taken by the lender will depend on the type of credit loan you agreed to, how much money you borrowed and your credit history – how you have repaid your debts in the past.

Your lender may ask for the following type of security:

A chattel mortgage: Chattel is property that you own such as a car or a boat. The lender will often take an interest in this property as security against a loan. The interest gives the lender the right to seize the property if you do not repay the debt. You cannot sell the property, or give it as security on another loan.

A promissory note: This is an unconditional written promise to pay an amount of money to the lender. Lenders will often take this note in addition to a chattel mortgage. Once the debt is paid in full, ask to have the promissory note to be cancelled and returned to you.

A co-signer: Sometimes the lender will ask for another person to sign the contract and be also responsible for the debt. If you fail to make the required payments, the co-signer must make the payments.

Collateral Mortgage: Equity in your home is the difference between the value of your home, and what you owe. For example, if your home is worth $175,000 and you owe $100,000, your equity in your home is $75,000. If the lender takes your equity as security and you do not repay the loan the lender will take the necessary legal action to collect on the debt.

Whenever you make a purchase on credit, you are entering into a contract. Make sure that you read the terms of the contract carefully before you sign or use their credit option. The terms of the contract must include the following information:

• A description of the goods

• The amount of the loan

• Interest and service charge costs for the loan

• The dates and amounts of payments due

• Any other charges for the loan such as administration fees

• The total amount to be repaid

• Balance to be paid at any one time

• Description of security taken for a loan, if any

• Down payments or trade-in allowance

There may be an acceleration term in the contract. The acceleration term gives the lender a right to demand full payment of the debt immediately. Read the term carefully to see what circumstances are required and what the proper procedure is to enforce the demand. For example, you must be given written notice if the lender is going to make the demand.

If you are having financial difficulty in repaying your debts, ask your lender to accept a lower payment until you are able to repay the debt. If the lender does not cooperate, call the Credit Counselling Service of Alberta at 403-265-2201 in Calgary, 780-423-5265 in Edmonton or 1-888-294-0076 toll-free in Alberta. They can assist by assessing your debt situation and provide you with some alternatives to repay your debts. They can also force your creditors to accept smaller debt payments and protect you from the garnishee of your wages. If your financial problems are extreme, you may wish to declare personal bankruptcy. Personal bankruptcy is a legal process which allows insolvent persons relief from their debts and the opportunity to start over.